How to protect your GC business from material price increases due to COVID-19 pandemic?

Map of the world showing Coronavirus spread

COVID-19 has disrupted our lives and business in more than one way…it has altered the definition of normal and disrupted the key worldwide suppliers’ ability to manufacture and deliver goods as needed.

The impact started this January in China where the COVID-19 was first discovered and where it manifested rapidly in over 80,000 reported cases around 3,300 deaths. The outcome was disastrous as it caused government enforced shutdown causing extensive delays in return of their workforce after the Chinese New Year.

The impact on the rest of the world unfolded in two major ways – first with the epidemic in China becoming a pandemic across the world, and second with shortage of Chinese raw materials, parts and finished goods around the world.

So how is supply chain impacted in South East Asia?

While there are many countries across South Asia that were able to slow down the spread of COVID-19 by staying ahead with timely shelter in place or lockdown procedures, they could not escape their inevitable dependability on the parts and materials from China to finish their products. Shortage of these parts eventually is pushing major manufacturers in countries such as Vietnam, Malaysia and Thailand to increase their prices.

Despite China slowly reeling back to the post-pandemic stage of this crises…it will be a while before its whole supply chain logistics machinery for the hotel construction and remodeling goods is fully cranked up and running at its full potential prior to COVID-19. 

Impact of COVID-19 on construction materials shortage
COVID 19 spread in US and Europe and its effect on inland logistics

What about rest of the world?

The biggest consumer countries of these goods, on the other hand, such as USA, Europe, and other parts of the world are experiencing the rise in infection and related deaths due to COVID-19. They are now shutting down economy rapidly in their attempt to expand social distancing and flattening the curve of new reported Coronavirus cases. This in turn has caused a major disruption to the whole shipping, port receiving and inland transportation industry.

Within the U.S. at least 29 states, including California and Washington, have already ordered their residents to Stay-At-Home. The impact of such lock-down especially in California and Washington – the two states that act as a major artery for receiving fresh supply of overseas manufactured goods – can be felt clearly in the delay and lack of supply for these goods for the current projects. And while the lock-down has also tempered with the current demand for new hotel builds or upgrading old hotels, the overall demand for materials and goods needed for these projects will return to normal much faster if we were to succeed in contain this epidemic.

How is it affecting the prices of materials for hotel construction and remodeling? What can you do?

It is, therefore, very likely that the construction companies or general contractors working on building new hotels or the wholesalers supplying and installing case goods at their client hotel locations will need to re-visit their contracts. They need to renegotiate their contract prices to compensate for price increase they absorb on the building materials, furniture items, fixtures, and equipment they use in delivering their contractual obligations.

In assessing your contract with your customers i.e. the hotel owners / hotel franchise, the best way is to use the ‘Escalation Clause’ in your contract. This clause allows a general contractor or service provider to increase the price of their work to compensate for increase in the prices of materials, goods and labor they use in the process, especially if such increase is caused by factors beyond the control of parties to the contract.

This clause allows you to shift the burden of price increase from you (the general contractor or supplier) to your customer (the hotel owners).

Increasing hotel construction material and goods costs
Suppliers and vendors who are still selling cheaper case goods shower doors and tub surrounds

Final thoughts…

If your current contract doesn’t have an Escalation Clause, you would need to approach the matter with your customers and re-negotiate to build such a clause into your contract to protect your interest. Please consult with an attorney for appropriate guidance in this matter. The other option would be to explore harder and look for vendors such as Pentwater Bath who are willing to absorb all the price increase at their end so you don’t have to; to demonstrate their commitment in weathering this pandemic with you as your true business partner.

In these unprecedented times, every businesses are diligently looking for ways to cope with their shrinking revenues and bottom lines. So go ahead and take that leap of faith, make that phone call and ask your customers if they will accommodate the price increase or will your vendor absorb some of the material cost. You may surprise yourself, pleasantly!